Harmonizing Securities across East Africa

June 28, 2015

Countries in East African region have distinct securities market practices, which have evolved markedly over time and rapidly in recent years. Greater harmonization of post-trade market practices is beginning to emerge. Rwanda Stock Exchange(RSE),Nairobi Securities Exchange(NSE),Dar Es Salaam Stock Exchange(DSE) and Uganda Securities Exchange(USE) offers the regional population to invest in stocks. In Kenya, for example, running complementary to the ongoing development of regional fund initiatives and post-trade integration, some degree of harmonization would bring with it greater connectivity amongst the region’s financial markets.East African region growth prospects are bolstered by such integration efforts under the East African Community(EAC) plan 2025, increasing the region’s potential to represent a key growth pillar.Setting up of East African Securities Exchanges, a collaboration of four stock exchanges with a market capitalization of more than $8billion will be looking to promote EAC as a single asset class and further intra-regional capital market integration. If fully implemented, this greater connectivity within the region would promote cross-border investment and offer heightened growth opportunities.

At the moment,different market practices across EAC result in a unique set of market access, fund repatriation, and servicing process frameworks in each country.These differences exist in areas such as account opening, treasury management and foreign exchange, as well as corporate actions, tax processes and proxy events.At the depository level, account structures can be omnibus or segregated depending on market requirements.In addition, Know Your Customer and anti-money laundering documents can be different for the same account structure within East Africa.These differences create a burden on investors and their service providers. But there has been progress in Kenya, for example.The recent announcement by Nairobi Securities Exchange to simplify know your customer requirements and roll out a new registration process for foreign portfolio investors with designated depository participants is a positive step towards a progressive easing of cross-border investor access.While the need for account segregation might still be required at the depository level to identify foreign ownership, prevent market misconduct, or comply with downstream processes such as proxy responses and tax requirements, a harmonized approach to market documentary requirements within the region for different account structures would be beneficial.

In Uganda, issuers offering equities and debt in multiple jurisdictions within the country are allowed to comply with a single set of disclosure standards for prospectuses, enabling them to gain greater time efficiencies and cost savings.This could be a reference point for a harmonization approach to documentary requirements for account opening in the region.Another parallel could be the concept of a Kenya has been mulling about which is Know Your Customer (KYC)“utility” in the financial industry jargon.Treasury management and foreign exchange treasury management in East Africa is another complex area, with reporting and documentary requirements for foreign exchange varied across markets.In Tanzania, foreign exchange trades involving local currencies and cannot be booked offshore for securities investment-related transactions.As a result, instead of settling their Forex Exchange in one central location, cross-border investors are required to send their funding currencies to the respective onshore locations to settle their transactions.And some of these onshore currencies come with additional restrictions,which can make treasury management at a company level even more challenging.While Foreign Exchange restrictions may continue to exist, I believe East African countries should simplify and harmonize documentary requirements and reporting to alleviate the administrative burden of processing these currencies for investments in individual countries.

Corporate actions have been widely recognized as a high-risk area in the post-trade environment.In Uganda, timely and efficient corporate action event notifications and processing are important for asset managers and investors to make informed decisions.The diverse nature of the Nairobi Securities Exchange in Kenya has increased the level of complexity in corporate action processing according to a recent report.Distributing income payments is an opportunity area for harmonization.The number of days between the record date like the date specifying which holders are entitled to receive the income and the payment date can vary from one to several weeks across each country. Hence, having a regular payment cycle can help investors and service providers manage funds more efficiently.Tax relief and reclaims processes on income payment also vary across countries in the region. Some of these processes can inadvertently create administrative burden and indirect costs for the investors.A PriceWaterhouseCoopers(East Africa) study few years back cited that effective and streamlined tax process in the region could increase market efficiency and promote investments.Undoubtedly,there are areas where the private and public sectors could collaborate for their mutual benefit by sharing best practices with the rest of the East Africa region.Identifying and improving these market practices are steps that need to be taken before any meaningful harmonization can take place and there is a consensus among the region’s watchers I have talked to that the process should start now and gradually bring the East Africa region closer to an overall vision of greater connectivity, efficiency and growth.

Contador Harrison